Recently, in TSB v Ketua Pengarah Hasil Dalam Negeri, the Special Commissioners of Income Tax (SCIT) ruled that gains from the disposal of agricultural right to plant oil palm were not subject to income tax under Section 4(a) of the Income Tax Act 1967 (ITA). This decision affirms that said gains were capital in nature and do not form part of the taxpayer’s trading income.
The taxpayer was successfully represented by the firm’s Tax, SST & Customs Partner, S. Saravana Kumar and associate, Tan Jass Key.
Brief Facts
The taxpayer was principally engaged in the cultivation of palm oil. In 2009, its holding company, RSB, acquired thecommercial rights under a Licence of Planted Forest to establish, develop and maintain a plantation in a large area known as the SMJ Estate. On the same day, RSB assigned these rights to the taxpayer for long-term investment purposes. These rights were consistently recorded as intangible assets inthe taxpayer’s audited accounts.
In 2017, the taxpayer disposed of the agricultural rights back to RSB. Following the disposal, the taxpayer submitted the real property gains tax (RPGT) return and paid the corresponding RPGT assessment. However, the Inland Revenue Board (Revenue) later raised an additional assessment for the sum of RM30,689,661.29. Aggrieved by ths assessment, the taxpayer filed a notice of appeal (Form Q) to the SCIT.
Issue For Determination
The primary issue before the SCIT was whether the gains from the disposal of the agricultural rights were taxable as trading receipt under Section 4(a) of the ITA or as capital receipt subject to the Real Property Gains Tax Act 1976 (RPGTA).
The Taxpayer’s Contentions
(a) Legal precedents on the transfer of rights
The taxpayer emphasised that this matter involved the disposal of agricultural right, not the sale of land or property. SMJ Estate was not a titled land and as such, there was no sale and purchase agreement or memorandum of transfer for the transfer of land title. The taxpayer merely held the right to establish and develop the estate, and not ownership of the land itself.
For instance, in SE Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2009) MSTC 3,912, a prop development and investment company sold its right to build a hotel above a shopping complex to its wholly-owned subsidiary. The SCIT found the right was not a trading stock but a capital asset and as such, the gains from the disposal were subject to RPGT. Among other reasons, the taxpayer’s objectives, including property investment and operating a hotel, indicated that the shopping complex and hotel were treated as capital assets to derive long-term investment and rental income.
(b) Badges of trade showed no intention to trade
The taxpayer contended that there was no trading activity or adventure of trade undertaken by the taxpayer. Pursuant to the examination of the badges of trade test, the taxpayer argued the gains were capital receipt based on these factors:
(i) Long-Term Investment
The taxpayer’s principal activity was oil palm cultivation. From 2010 to 2016, the taxpayer invested in land clearing, maintenance and infrastructure development to support long-term cultivation of the palm oil within the estate.
(ii) Accounting Treatment
The agricultural right acquired by the taxpayer was consistently held as the taxpayer’s intangible asset in its audited accounts. Had the taxpayer intended to use the agricultural right for trading purposes, it would have been treated as the taxpayer’s current asset.
(iii) Period Of Ownership And Frequency
The agricultural right was held for 7 years before being disposed of in 2017. The agricultural right was the only right held and disposed of during the taxpayer’s 7-year ownership period.
(iv) Reason For Disposal
The taxpayer sold the agriculture right due to the financial distress suffered by its ultimate holding company, which had accumulated RM 585 million in debt. Additionally, the 25 year restriction on oil palm cultivation limited the further use of the rights. Part of the proceeds was later reinvested in a mill and estate for more stable returns.
(v) Control And Improvements
The Revenue’s claim of control over the disposal was unsupported. Control is not a recognised badge of trade. The taxpayer’s improvements to the estate, such as constructing roads and drainage systems,were for cultivation purposes, not to enhance marketability and saleability of the estate.
The Revenue’s Contention
The Revenue argued that the taxpayer held the agricultural right as a trading stock, for these reasons:
(i) The disposal involved the trading of SMJ Estate rather than agricultural right.
(ii) The series of transactions and significant consideration suggested trading of land right.
(iii) Accounting evidence alone was not conclusive.
(iv) A 7-year ownership period was relatively short.
(v) Alterations and improvements made to SMJ Estate made it more saleable.
(vi) The presence of infrastructure and oil palm trees acted as a “ready-made” advertisement.
(vii) The sale was not driven by immediate financial needs.
Conclusion
The SCIT allowed the taxpayer’s appeal and accordingly, the disputed notice of additional assessment was set aside.
By emphasising that the disposal involved agricultural rights—not land—the taxpayer effectively demonstrated that its intention in acquiring these rights was for long-term investment rather than trading activity. This decision serves as a timely reminder that the context and treatment of assets are important when determining taxability of gains arising from such disposals, reaffirming that not all disposal of right is subject to income tax.
6 March 2025